Independent directors in real estate firms resign on RERA fear

MUMBAI: Fearing that the new Real Estate (Regulation & Development) Act (RERA) could land them in trouble, many independent directors are resigning from the boards of real estate developers; and worse few are willing to replace them. The fear is that under RERA, independent directors can be held accountable in case a company fails to comply with the new regulations that are quite stringent.

“The way RERA reads today, many independent directors will have a liability in case the developer is unable to follow the regulatory guidelines. The increased liability of the independent director is also causing many people to stay away from real estate boards,” said Rajesh Narain Gupta, managing partner at law firm SNG & Partners. According to data compiled by Prime Database, about 33 independent directors resigned from the listed real estate companies since April this year. Of these, about 22 have resigned since August 1, when clarity around RERA emerged. Going ahead industry experts expect more independent directors to step down.

A person who recently quit as an independent director in an unlisted Mumbai-based realty company told ET: “I didn’t quite know what exactly was happening in the company; it was very opaque structure. Going ahead, this could be a huge risk. The promoters weren’t very happy, but it wasn’t worth the risk,” he said. The Indian real estate sector has a long history of delayed projects, poor quality and illegal construction. A recent research report by real estate consultancy Jones Lang LaSalle (JLL) said about 25% of the housing projects are delayed across India. The inventory of residential stock is more than 14-15 months, it said. Even the big organised players are fighting several lawsuits filed by disappointed homebuyers. RERA is aimed at keeping irregularities in the sector under control and is set to provide afillip to the overall real estate funding environment, said experts.

A developer would be required to take disciplined approach for project execution and the same should reflect in the investment agreements by any private equity investor. Experts said a bigger problem is with unlisted players where irregularities may be comparatively more than the listed players.

Many fear that that RERA combined with the Companies Act would unsettle independent directors on board of several real estate firms across the country, leading to several such people stepping down over the next six months. Industry trackers say that the first to resign would be directors in loss-making companies, where the directors' income is impacted because of the inability to earn compensation on profits. This also comes at a time when private equity funds and strategic investors in the real estate sector are looking to include their rights in the investment documents to avoid liability arising out of non-performance.

Many such investors who have invested mainly at project level are renegotiating their contracts with the developers, fearing litigation and fines once the new real estate regulations come in to force.

The fear is that under RERA they can be labelled as developer and may have to face strict penalties for any violation of rules by the projects they fund.

Currently, the Goods and Services Tax (GST) is levied at 12 per cent on payments made for under-construction property or ready-to-move-in flats where completion certificate has not been issued at the time of sale.